January 2021 – 

 

FINANCIAL PLANNING TOPICS FOR THE NEW YEAR

 

 

RMDs are ON for 2021

 

For those required to take an RMD in 2019 and those turning age 72 in 2020 or 2021, you are required to take a minimum distribution from your retirement savings, including 401(k) plans and individual retirement accounts, with few exceptions. Under the SECURE Act, your “required beginning date” or RBD was pushed to April 1st of the year following the year in which you turned age 72 IF you reached 70 ½ before January 1, 2020. Otherwise, and for all subsequent years, you must take your RMD by December 31st of the year. You may be taking two RMDs in one year if this is your first year receiving RMDs. This may be confusing, but we can help!

 

Beneficiaries of Inherited IRAs also had reprieve in 2020 but will need to resume distributions in 2021. If the original IRA account owner died on or after January 1, 2020, distribution and withdrawal plans should be reviewed. There are generally three categories of IRA beneficiaries: 1) Spouse 2) Non-spouse, such as a child, sibling, or friend, and 3) Entities, such as a trust, an estate, or a charitable organization. A surviving spouse can simply roll the inherited IRA into their own IRA and follow the above noted rules. However, if you need the money and are under the age of 59 ½, you may not want to do that. Non-spouse beneficiaries must withdraw the total amount within 10 years, but there are some exceptions. Entity beneficiaries allow distributions based on the remaining Single Life Expectancy of the IRA owner IF the account holder reached age 72 by April 1st of that year. If the account owner was younger than 72 by April 1st, then the assets must be completely distributed by the end of the 5th year anniversary of the IRA owner’s death.

 

Planning in 2021

 

Each year, we recommend becoming familiar with changes to contribution limits, deductions, income phase-out ranges, and the like. According to the U.S. Labor Department, annual inflation for the 12 months ending November 2020 was 1.2%. This modest increase can also be seen in a few of the aforementioned items. For example, health savings account contribution limits increased to $3,600 for individuals and $7,200 for families, which is a $50 and $100 increase, respectively.

Employee contributions to tax-deferred accounts are unchanged from 2020. An employee can contribute $19,500, plus $6,500 if age 50 or older, to their 401(k) or 403(b). SIMPLE IRA plans continue to have $13,500 as the maximum employee contribution. Individual retirement plans, including Roth IRA contributions, will remain at $6,000, plus $1,000 if age 50 or older. The IRA contribution limits last increased in 2019 from the 2018 amount of $5,500. Phase-out ranges for Roth contributions increased by $1,000 to $125,000 – $140,000 in MAGI, or modified adjusted gross income, for Single and Head of Household, and $198,000- $208,000 in MAGI for Married Filing Jointly, for 2021. The phase-out amounts appear to increase each year, as it was a max of $135,000 for Singles and $199,000 for MFJ in 2018, but the actual contribution limit increases tend to lag a year.

Other tax-related items included tax brackets, which are all up slightly in 2021 from 2020. The 2021 standard deduction is also up $150 for Single, Head of Household, and Married Filing Separately, and up $300 for Married Filing Jointly. Most taxpayers have found themselves taking the standard deduction since the TCJA, but there remains no limitation in itemized deductions through 2025.

The gift tax annual exclusion remains at $15,000, where it has been since 2018, but estate tax exclusion limits increased slightly in 2021.

For those of you who may be getting parking or public transportation benefits paid for by their employer, for 2021, you can receive up to $270 per month in transportation fringe benefits before it hits your taxable income.

 

 

 

The information contained in this material is based on sources believed to be true and reliable; however, its accuracy is not guaranteed. This material should not be construed as a recommendation to buy or sell specific securities. Views are based on market conditions, economic data, and other information at the time of publication and are subject to change.